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EX-31.2 - EX-31.2 - FERRO CORPc214-20150630xex312.htm
EX-32.1 - EX-32.1 - FERRO CORPc214-20150630xex321.htm
EX-32.2 - EX-32.2 - FERRO CORPc214-20150630xex322.htm
EX-31.1 - EX-31.1 - FERRO CORPc214-20150630xex311.htm

Bel

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

 

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

Commission File Number 1-584

 

 

 

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

Ohio

(State or other jurisdiction of

incorporation or organization)

 

34-0217820

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

 

6060 Parkland Boulevard

Suite 250

Mayfield Heights, OH

(Address of principal executive offices)

 

44124

(Zip Code)

 

 

 

 

 

 

 

216-875-5600

(Registrant’s telephone number, including area code)

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO

At June 30, 2015, there were 87,269,707 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

 

 

 

 

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands, except per share amounts)

Net sales

 

$

268,214 

 

$

294,217 

 

$

530,986 

 

$

574,944 

Cost of sales

 

 

190,574 

 

 

215,763 

 

 

382,711 

 

 

421,537 

Gross profit

 

 

77,640 

 

 

78,454 

 

 

148,275 

 

 

153,407 

Selling, general and administrative expenses

 

 

52,695 

 

 

49,260 

 

 

102,151 

 

 

100,629 

Restructuring and impairment charges

 

 

1,116 

 

 

1,958 

 

 

1,625 

 

 

6,308 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

3,110 

 

 

4,673 

 

 

6,260 

 

 

9,184 

Interest earned

 

 

(57)

 

 

(14)

 

 

(94)

 

 

(29)

Foreign currency losses, net

 

 

2,827 

 

 

27 

 

 

4,555 

 

 

1,373 

Miscellaneous (income) expense, net

 

 

(161)

 

 

3,456 

 

 

238 

 

 

4,218 

Income before income taxes

 

 

18,110 

 

 

19,094 

 

 

33,540 

 

 

31,724 

Income tax expense

 

 

5,679 

 

 

5,186 

 

 

8,138 

 

 

7,667 

Income from continuing operations

 

 

12,431 

 

 

13,908 

 

 

25,402 

 

 

24,057 

(Loss) income from discontinued operations, net of income taxes

 

 

(5,646)

 

 

(3,520)

 

 

(9,602)

 

 

3,064 

Net income

 

 

6,785 

 

 

10,388 

 

 

15,800 

 

 

27,121 

Less: Net income (loss) attributable to noncontrolling interests

 

 

186 

 

 

429 

 

 

(1,769)

 

 

(43)

Net income attributable to Ferro Corporation common shareholders

 

$

6,599 

 

$

9,959 

 

$

17,569 

 

$

27,164 

Earnings (loss) per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.14 

 

$

0.15 

 

$

0.31 

 

$

0.28 

Discontinued operations

 

 

(0.06)

 

 

(0.04)

 

 

(0.11)

 

 

0.03 

 

 

$

0.08 

 

$

0.11 

 

$

0.20 

 

$

0.31 

Diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.14 

 

$

0.15 

 

$

0.31 

 

$

0.27 

Discontinued operations

 

 

(0.06)

 

 

(0.04)

 

 

(0.11)

 

 

0.04 

 

 

$

0.08 

 

$

0.11 

 

$

0.20 

 

$

0.31 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands)

Net income

 

$

6,785 

 

$

10,388 

 

$

15,800 

 

$

27,121 

Other comprehensive income (loss), net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation income (loss)

 

 

9,407 

 

 

(140)

 

 

(28,389)

 

 

(490)

Postretirement benefit liabilities loss

 

 

(18)

 

 

(14)

 

 

(2)

 

 

(50)

Other comprehensive income (loss), net of income tax

 

 

9,389 

 

 

(154)

 

 

(28,391)

 

 

(540)

Total comprehensive income (loss)

 

 

16,174 

 

 

10,234 

 

 

(12,591)

 

 

26,581 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

185 

 

 

102 

 

 

(2,908)

 

 

(550)

Comprehensive income (loss) attributable to Ferro Corporation

 

$

15,989 

 

$

10,132 

 

$

(9,683)

 

$

27,131 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

ASSETS

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

211,413 

 

$

140,500 

Accounts receivable, net

 

 

242,482 

 

 

236,749 

Inventories

 

 

158,030 

 

 

158,368 

Deferred income taxes

 

 

6,508 

 

 

7,532 

Other receivables

 

 

26,753 

 

 

25,635 

Other current assets

 

 

14,424 

 

 

17,912 

Current assets held-for-sale

 

 

17,570 

 

 

27,087 

Total current assets

 

 

677,180 

 

 

613,783 

Other assets

 

 

 

 

 

 

Property, plant and equipment, net

 

 

194,459 

 

 

212,642 

Goodwill

 

 

92,976 

 

 

93,733 

Intangible assets, net

 

 

56,973 

 

 

57,309 

Deferred income taxes

 

 

36,186 

 

 

39,712 

Other non-current assets

 

 

63,863 

 

 

60,982 

Non-current assets held-for-sale

 

 

32,892 

 

 

18,737 

Total assets

 

$

1,154,529 

 

$

1,096,898 

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

7,332 

 

$

8,382 

Accounts payable

 

 

125,838 

 

 

129,236 

Accrued payrolls

 

 

25,048 

 

 

36,051 

Accrued expenses and other current liabilities

 

 

47,842 

 

 

53,133 

Current liabilities held-for-sale

 

 

6,841 

 

 

10,016 

Total current liabilities

 

 

212,901 

 

 

236,818 

Other liabilities

 

 

 

 

 

 

Long-term debt, less current portion

 

 

406,331 

 

 

303,629 

Postretirement and pension liabilities

 

 

157,924 

 

 

167,772 

Other non-current liabilities

 

 

47,087 

 

 

50,359 

Non-current liabilities held-for-sale

 

 

2,168 

 

 

2,304 

Total liabilities

 

 

826,411 

 

 

760,882 

Equity

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 87.3 million and 87.0 million shares outstanding at June 30, 2015, and December 31, 2014, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

314,094 

 

 

317,404 

Retained earnings

 

 

88,976 

 

 

71,407 

Accumulated other comprehensive loss

 

 

(49,057)

 

 

(21,805)

Common shares in treasury, at cost

 

 

(128,055)

 

 

(136,058)

Total Ferro Corporation shareholders’ equity

 

 

319,394 

 

 

324,384 

Noncontrolling interests

 

 

8,724 

 

 

11,632 

Total equity

 

 

328,118 

 

 

336,016 

Total liabilities and equity

 

$

1,154,529 

 

$

1,096,898 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferro Corporation Shareholders

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

in Treasury

 

 

 

 

 

 

 

Retained

 

Other

 

Non-

 

 

 

 

 

 

 

 

 

 

Common

 

Paid-in

 

Earnings

 

Comprehensive

 

controlling

 

Total

 

 

Shares

 

Amount

 

Stock

 

Capital

 

(Deficit)

 

Income (Loss)

 

Interests

 

Equity

 

 

(Dollars in thousands)

Balances at December 31, 2013

 

6,730 

 

$

(143,802)

 

$

93,436 

 

$

318,055 

 

$

(14,664)

 

$

8,493 

 

$

12,325 

 

$

273,843 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27,164 

 

 

 —

 

 

(43)

 

 

27,121 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33)

 

 

(507)

 

 

(540)

Stock-based compensation transactions

 

(268)

 

 

7,154 

 

 

 —

 

 

(2,516)

 

 

 —

 

 

 —

 

 

 —

 

 

4,638 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(206)

 

 

(206)

Balances at June 30, 2014

 

6,462 

 

 

(136,648)

 

 

93,436 

 

 

315,539 

 

 

12,500 

 

 

8,460 

 

 

11,569 

 

 

304,856 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

6,445 

 

 

(136,058)

 

 

93,436 

 

 

317,404 

 

 

71,407 

 

 

(21,805)

 

 

11,632 

 

 

336,016 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

17,569 

 

 

 —

 

 

(1,769)

 

 

15,800 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(27,252)

 

 

(1,139)

 

 

(28,391)

Stock-based compensation transactions

 

(280)

 

 

8,003 

 

 

 —

 

 

(3,310)

 

 

 —

 

 

 —

 

 

 —

 

 

4,693 

Balances at June 30, 2015

 

6,165 

 

$

(128,055)

 

$

93,436 

 

$

314,094 

 

$

88,976 

 

$

(49,057)

 

$

8,724 

 

$

328,118 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2015

 

2014

 

 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net cash provided by operating activities

 

$

3,934 

 

$

2,670 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures for property, plant and equipment and other long lived assets

 

 

(26,554)

 

 

(32,805)

Proceeds from sale of assets

 

 

125 

 

 

5,755 

Acquisition of TherMark

 

 

(5,479)

 

 

 —

Net cash used in investing activities

 

 

(31,908)

 

 

(27,050)

Cash flows from financing activities

 

 

 

 

 

 

Net repayments under loans payable (1)

 

 

(931)

 

 

(42,097)

Proceeds from revolving credit facility

 

 

105,000 

 

 

370,582 

Principal payments from term loan facility

 

 

(1,500)

 

 

 —

Principal payments on revolving credit facility

 

 

 —

 

 

(282,218)

Other financing activities

 

 

(181)

 

 

365 

Net cash provided by financing activities

 

 

102,388 

 

 

46,632 

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,501)

 

 

(391)

Increase in cash and cash equivalents

 

 

70,913 

 

 

21,861 

Cash and cash equivalents at beginning of period

 

 

140,500 

 

 

28,328 

Cash and cash equivalents at end of period

 

$

211,413 

 

$

50,189 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

7,045 

 

$

12,126 

Income taxes

 

$

9,482 

 

$

4,112 

 

(1) Includes cash flows related to our domestic accounts receivable program and loans payable to banks.

See accompanying notes to condensed consolidated financial statements.

 

 

7


 

Ferro Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

The Company owns 51% of an operating affiliate in Venezuela that is a consolidated subsidiary of Ferro. During the first quarter of 2015, the Ministry of Economy, Finance, and Public Banking, and the Central Bank of Venezuela published a new exchange rate, the Foreign Exchange Marginal System (“SIMADI”). We concluded in March 2015 that SIMADI was the most relevant exchange mechanism available, and began using SIMADI to translate the local currency financial statements.  As a result of the revaluation, we recognized a $1.9 million foreign currency loss and a $2.6 million loss due to lower of cost or market charges against our inventory, prior to the adjustment for losses allocated to our noncontrolling interest partner, which is recorded within Foreign currency losses, net and Cost of sales, respectively, within our condensed consolidated statement of operations for the six months ended June 30, 2015. We had $1.2 million of assets and $1.1 million of liabilities that are included in the condensed consolidated balance sheet at June 30, 2015.

 

 In the first quarter of 2014, the Venezuelan government expanded and introduced alternative market mechanisms for monetary exchange between the local currency, the Bolivar, and the United States Dollar. As a result of changes in the political and economic environment in the country, we began to remeasure the monetary assets and liabilities of the entity utilizing the most relevant exchange mechanism available, which we concluded to be SICAD I in the first quarter of 2014.  The impact of the remeasurement in the first quarter of 2014, prior to adjustment for losses allocated to our noncontrolling interest partner, was a loss of $1.6 million which is recorded within Foreign currency losses, net within our condensed consolidated statement of operations for the six months ended June 30, 2014. 

 

During the second quarter of 2014, substantially all of the assets and liabilities of the Specialty Plastics and Polymer Additives reportable segments were classified as held-for-sale.  As further discussed in Note 3, the Specialty Plastics sale closed on July 1, 2014, and the North America-based Polymer Additives sale closed on December 19, 2014.  Therefore, the Specialty Plastics and North America-based Polymer Additives operating results, net of tax, have been classified as discontinued operations for the three and six months ended June 30, 2014.  We have classified the Europe-based Polymer Additives assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.

 

Operating results for the three and six months ended June 30, 2015, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2015.

 

 

2.    Recent Accounting Pronouncements

Accounting Standards Adopted in the period ended June 30, 2015

On January 1, 2015, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,  which is codified in ASC Topic 205, Presentation of Financial Statements, and ASC Topic 360, Property, Plant, and Equipment. This pronouncement changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, and changes the criteria and enhances disclosures for reporting

8


 

discontinued operations. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

On January 1, 2015, we adopted FASB ASU No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

On January 1, 2015, we adopted FASB ASU No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination. ASU 2014-18 is an accounting alternative which applies when an entity is required to recognize or otherwise consider the fair value of intangible assets as a result of specific transaction. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

 

New Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items: Subtopic 225-20. ASU 2015-01 eliminates the concept of extraordinary items.  This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.  ASU 2015-01 may be applied prospectively or retrospectively to all prior periods presented in the financial statements.  We do not expect the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis: Topic 810. This pronouncement makes amendments to the current consolidation guidance. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  ASU 2015-02 may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may be applied retrospectively. We do not expect the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 makes amendments to the presentation of debt issuance costs.  This pronouncement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  ASU 2015-03 should by applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

9


 

3.    Discontinued Operations

 

During the third quarter of 2014, we sold substantially all of the assets related to our Specialty Plastics business for a cash purchase price of $91.0 million. The transaction resulted in net proceeds of $88.3 million after expenses, and a gain of approximately $54.9 million. We have classified the Specialty Plastics operating results, net of income tax, as discontinued operations for the three and six months ended June 30, 2014.

 

During the second quarter of 2014, we commenced a process to market for sale all of the assets within our Polymer Additives business.  We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Plant and Equipment, have been met.  For purposes of applying the guidance within ASC 360, the assets have been categorized into two disposal groups: (1) our Europe-based Polymer Additives assets, including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities and (2) the remainder of the Polymer Additives assets, our North America-based Polymer Additives business.  During the fourth quarter of 2014, we sold substantially all of the assets related to our North America-based Polymer Additives business for a cash purchase price of $153.5 million.  The transaction resulted in net proceeds of $149.5 million after expenses, and a gain of approximately $72.7 million.  We have classified the operating results, net of income tax, as discontinued operations for the three and six months ended June 30, 2014.  We have classified the Europe-based Polymer Additives assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.

 

The table below summarizes results for Polymer Additives and Specialty Plastics, for the three and six months ended June 30, 2015 and 2014, which are reflected in our condensed consolidated statements of operations as discontinued operations.  Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands)

Net sales

 

$

7,837 

 

$

111,465 

 

$

19,736 

 

$

222,474 

Cost of sales

 

 

11,903 

 

 

92,314 

 

 

26,458 

 

 

188,801 

Gross (loss) profit

 

 

(4,066)

 

 

19,151 

 

 

(6,722)

 

 

33,673 

Selling, general and administrative expenses

 

 

1,009 

 

 

6,438 

 

 

2,228 

 

 

12,645 

Restructuring and impairment charges

 

 

 —

 

 

14,362 

 

 

 —

 

 

14,364 

Interest expense

 

 

206 

 

 

1,533 

 

 

319 

 

 

2,905 

Miscellaneous expense, net

 

 

365 

 

 

30 

 

 

333 

 

 

136 

(Loss) income from discontinued operations before income taxes

 

 

(5,646)

 

 

(3,212)

 

 

(9,602)

 

 

3,623 

Income tax expense

 

 

 —

 

 

308 

 

 

 —

 

 

559 

(Loss) income from discontinued operations, net of taxes

 

$

(5,646)

 

$

(3,520)

 

$

(9,602)

 

$

3,064 

 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

The following table summarizes the assets and liabilities which are classified as held-for-sale at June 30, 2015, and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

December 31, 2014

 

 

(Dollars in thousands)

Accounts receivable, net

 

$

6,129 

 

$

5,959 

Inventories

 

 

8,159 

 

 

19,217 

Other current assets

 

 

3,282 

 

 

1,911 

Current assets held-for-sale

 

 

17,570 

 

 

27,087 

Property, plant and equipment, net

 

 

32,374 

 

 

18,174 

Other non-current assets

 

 

518 

 

 

563 

Total assets held-for-sale

 

 

50,462 

 

 

45,824 

Accounts payable

 

 

5,602 

 

 

8,181 

Accrued expenses and other current liabilities

 

 

1,239 

 

 

1,835 

Current liabilities held-for-sale

 

 

6,841 

 

 

10,016 

Other non-current liabilities

 

 

2,168 

 

 

2,304 

Total liabilities held-for-sale

 

$

9,009 

 

$

12,320 

 

 

 

 

 

Included within noncurrent assets is a deferred tax asset of $12.9 million at June 30, 2015 and $14.1 million at December 31, 2014, which were completely reserved for at both periods.

 

 

4.    Acquisitions

 

In February 2015, the Company acquired TherMark Holdings, Inc., a leader in laser marking technology, for a cash purchase price of $5.5 million.  The Company recorded $4.6 million of amortizable intangible assets, $2.5 million of goodwill, $1.7 million of a deferred tax liability related to the amortizable intangible assets, and $0.1 million of net working capital on the condensed consolidated balance sheet at June 30, 2015.  At June 30, 2015, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.

In December 2014, Ferro Coatings Italy S.R.L., a 100% owned subsidiary of Ferro, acquired 100% of the outstanding common shares and voting interest of Vetriceramici S.p.A. (“Vetriceramici”) for a purchase price of €87.2 million in cash, or $108.9 million, based on the exchange rate on the closing date of December 1, 2014. Vetriceramici is an Italian manufacturing, marketing and distribution group that offers a range of products to its customers for the production of ceramic tiles, with some diversification in the glass sector.  We expect to achieve synergies and cost reductions by eliminating redundant processes and facilities.  The results of operations for this business have been included in the condensed consolidated financial statements since the date of acquisition.

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of June 30, 2015, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.

 

 

 

 

 

 

 

 

 

 

December 1, 2014

 

 

(Dollars in thousands)

Net working capital (1) 

 

$

27,055 

Real property

 

 

8,291 

Personal property

 

 

12,204 

Other assets and liabilities

 

 

(13,169)

Intangibles

 

 

42,060 

Goodwill

 

 

32,431 

Net assets acquired

 

$

108,872 

11


 

(1)

Net working capital is defined as current assets less current liabilities, and includes an estimate of potential transactional adjustments.

The estimated fair value of the receivables acquired is $26.0 million, with a gross contractual amount of $27.0 million. The Company preliminarily recorded acquired intangible assets subject to amortization of $37.9 million, which is comprised of $27.8 million of customer relationships and $10.1 million of technology/know-how, which will be amortized over 20 and 10 years, respectively.  The Company preliminarily recorded acquired indefinite-lived intangible assets of $4.2 million related to trade names and trademarks.

Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies. Goodwill has been allocated to the Performance Coatings and Performance Colors and Glass segments of $31.4 million and $1.0 million, respectively.  Goodwill is not expected to be deductible for tax purposes.

In July 2014, the Company acquired certain commercial assets of a reseller of our porcelain enamel products in Turkey for a cash purchase price of $6.7 million, which is recorded in Intangible assets, net on the consolidated balance sheets.

 

 

5.    Inventories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

Raw materials

 

$

44,124 

 

$

46,605 

Work in process

 

 

32,192 

 

 

32,356 

Finished goods

 

 

81,714 

 

 

79,407 

Total inventories

 

$

158,030 

 

$

158,368 

 

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.2 million for the three months ended June 30, 2015 and 2014, and were $0.4 million for the six months ended June 30, 2015 and 2014. We had on hand precious metals owned by participants in our precious metals consignment program of $26.7 million at June 30, 2015, and $26.6 million at December 31, 2014, measured at fair value based on market prices for identical assets and net of credits.

 

6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $440.2 million at June 30, 2015, and $442.4 million at December 31, 2014. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $3.8 million at June 30, 2015, and $4.0 million at June 30, 2014. 

 

During the second quarter of 2014, we sold non-operating real estate assets located in South Plainfield, New Jersey and in Criciuma, Brazil which resulted in gains of $1.2 million and $0.4 million, respectively.  The gains on sale were offset by losses associated with the loss on sale of our corporate related real estate and the write-off of tenant improvements of $3.5 million and $1.3 million, respectively.  The net loss of $3.3 million related to these transactions is recorded in Miscellaneous (income) expense, net within our condensed consolidated statements of operations for the three and six months ended June 30, 2014.

 

As discussed in Note 3 - Discontinued Operations, during the second quarter of 2014, our Europe-based Polymer Additives assets were classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment. As such, these assets were tested for impairment comparing the fair value of the assets less costs to sell to the carrying value.  The fair value was determined using both the market approach and income approach, utilizing Level 3 measurements within the fair value hierarchy, which indicated the fair value less costs to sell was less than the carrying value.  As a result of the analysis, the assets had a carrying value that exceeded fair value, resulting in an impairment charge of $14.4 million.  The impairment charge is included in (Loss) income from discontinued operations, net of income taxes within our condensed consolidated statements of operations for the three and six months ended

12


 

June 30, 2014. We performed additional impairment analysis at each of the reporting dates and recorded an additional $7.2 million impairment charge, which represents the additional capital expenditures related to the construction of the facility, in the three months ended September 30, 2014, for a full year 2014 impairment charge of $21.6 million.  Though the sale process of these assets has taken longer than initially expected, we continue to believe that it is probable that we will sell the Europe-based Polymer Additives assets within a year.

 

The following table presents information about the Company's impairment charges on assets that were measured on a fair value basis for the six months ended June 30, 2015 and for the year ended December 31, 2014.  The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine the fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Total

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(Losses)

 

 

(Dollars in thousands)

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

45,349 

 

$

45,349 

 

$

 —

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

37,400 

 

$

37,400 

 

$

(21,566)

 

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

 

7.    Debt

Loans payable and current portion of long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

Loans payable

 

$

3,442 

 

$

4,284 

Current portion of long-term debt

 

 

3,890 

 

 

4,098 

Loans payable and current portion of long-term debt

 

$

7,332 

 

$

8,382 

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Term loan facility

 

$

297,750 

 

$

299,250 

Revolving credit line

 

 

105,000 

 

 

 —

Capital lease obligations

 

 

4,382 

 

 

4,973 

Other notes

 

 

3,089 

 

 

3,504 

Total long-term debt

 

 

410,221 

 

 

307,727 

Current portion of long-term debt

 

 

(3,890)

 

 

(4,098)

Long-term debt, less current portion

 

$

406,331 

 

$

303,629 

 

New Credit Facility

On July 31, 2014, the Company entered into a new credit facility (the “New Credit Facility”) with a group of lenders to refinance the majority of its then outstanding debt.  The New Credit Facility consists of a $200 million secured revolving line of credit with a term of five years and a $300 million secured term loan facility with a term of seven years. Principal payments on the term loan facility of $0.75 million quarterly, are payable commencing December 31, 2014, with the remaining balance due on the maturity date. The New Credit Facility replaces the prior $250 million revolving credit facility and provided funding to repurchase the 7.875% 

13


 

Senior Notes. Subject to certain conditions, the Company can request up to $200 million of additional commitments under the New Credit Facility, though the lenders are not required to provide such additional commitments. In addition, up to $100 million of the revolving line of credit will be available to certain of the Company’s subsidiaries in the form of revolving loans denominated in Euros.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the New Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of most of the Company’s U.S. subsidiaries and 65% of most of the stock of the Company’s first tier foreign subsidiaries.

Interest Rate – Term Loan:  The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”) rate plus, in both cases, an applicable margin. 

·

The base rate will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’s prime rate or (iii) the daily LIBOR rate plus 1.00%

·

The applicable margin for base rate loans is 2.25%.  

·

The LIBOR rate will be set as quoted by Bloomberg and shall not be less than 0.75%.

·

The applicable margin for LIBOR rate loans is 3.25%.

·

For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration. 

At June 30, 2015, the Company had borrowed $297.8 million under the term loan facility at an annual rate of 4.0%.  There were no additional borrowings available under the term loan facility. 

Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus an applicable variable margin.  The variable margin will be based on the ratio of (a) the Company’s total consolidated debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended. 

·

The base rate will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’s prime rate or (iii) the daily LIBOR rate plus 1.00%

·

The applicable margin for base rate loans will vary between 1.50% and 2.00%.

·

The LIBOR rate will be set as quoted by Bloomberg for U.S. Dollars.

·

The applicable margin for LIBOR Rate Loans will vary between 2.50% and 3.00%.

·

For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.

At June 30, 2015, the Company had borrowed $105.0 million under the revolving credit line.  The borrowing on the revolving credit line was used to fund the Nubiola acquisition.  Refer to footnote 17 for additional details. After reductions for outstanding letters of credit secured by these facilities, we had $90.1 million of additional borrowings available at June 30, 2015.

The New Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions and limitations on certain types of investments.  The New Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.

    Specific to the revolving credit facility, the Company is subject to financial covenants regarding the Company’s outstanding net indebtedness and interest coverage ratios.

If an event of default occurs, all amounts outstanding under the New Credit Facility may be accelerated and become immediately due and payable.  At June 30, 2015, we were in compliance with the covenants of the New Credit Facility.

 

 

14


 

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $27.0 million and $10.8 million at June 30, 2015 and December 31, 2014, respectively. The unused portions of these lines provided additional liquidity of $26.5 million at June 30, 2015, and $9.3 million at December 31, 2014.

 

 

8.    Financial Instruments

The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Carrying

 

Fair Value

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

(Dollars in thousands)

Cash and cash equivalents

 

$

211,413 

 

$

211,413 

 

$

211,413 

 

$

 —

 

$

 —

Loans payable

 

 

(3,442)

 

 

(3,442)

 

 

 —

 

 

(3,442)

 

 

 —

Term loan facility

 

 

(297,750)

 

 

(308,929)

 

 

 —

 

 

(308,929)

 

 

 —

Revolving credit line

 

 

(105,000)

 

 

(105,211)

 

 

 —

 

 

(105,211)

 

 

 —

Other long-term notes payable

 

 

(3,089)

 

 

(2,522)

 

 

 —

 

 

(2,522)

 

 

 —

Foreign currency forward contracts, net

 

 

439 

 

 

439 

 

 

 —

 

 

439 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Carrying

 

Fair Value

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

(Dollars in thousands)

Cash and cash equivalents

 

$

140,500 

 

$

140,500 

 

$

140,500 

 

$

 —

 

$

 —

Loans payable

 

 

(4,284)

 

 

(4,284)

 

 

 —

 

 

(4,284)

 

 

 —

Term loan facility

 

 

(299,250)

 

 

(310,453)

 

 

 —

 

 

(310,453)

 

 

 —

Other long-term notes payable

 

 

(3,504)

 

 

(2,861)

 

 

 —

 

 

(2,861)

 

 

 —

Foreign currency forward contracts, net

 

 

713 

 

 

713 

 

 

 —

 

 

713 

 

 

 —

 

The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity.  The fair values of the term loan facility, the revolving credit line and other long-term notes payable are based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's non-performance risk. 

Foreign currency forward contracts.  We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as Foreign currency losses, net in the condensed consolidated statements of operations. We recognized net foreign currency losses of $2.8 million and $4.6 million in the three and six months ended June 30, 2015, respectively, and net foreign currency losses of approximately $0.0 million and $1.4 million in the three and six months ended June 30, 2014, which is primarily comprised of the foreign exchange impact on transactions in countries where it is not economically feasible for us to enter into hedging arrangements and hedging inefficiencies, such as timing of transactions. We recognized net losses of $0.3 million and net gains of $1.3 million in the three and six months ended June 30, 2015 and net losses of $0.1 million and net gains of $2.3 million in the three and six months ended June 30, 2014, respectively, arising from the change in fair value of our financial instruments, which offset the related net gains and losses on international trade transactions. The fair values of these contracts are based on market prices for comparable contracts. The notional amount of foreign currency forward contracts was $268.0 million at June 30, 2015, and $145.9 million at December 31, 2014.

15


 

The following table presents the effect on our condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014, respectively, of our foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of (Loss)

 

 

 

 

Recognized in Earnings

 

 

 

 

Three Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

 

Location of Loss in Earnings

 

 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

(317)

 

$

(94)

 

Foreign currency losses, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain

 

 

 

 

Recognized in Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

Location of Gain in Earnings

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

1,328 

 

$

2,307 

 

Foreign currency losses, net

 

 

 

The following table presents the fair values on our condensed consolidated balance sheets of foreign currency forward contracts: